Federal Employees are about to see major changes to their Thrift Savings Plan (TSP) options next year. The TSP Modernization Act (H.R. 3031) recently passed to help federal employees better manage their Thrift Savings Plans, a 401(k) style savings plans used by more than five million participants.
The TSP bill is good news for current workers who need to occasionally withdraw funds, along with retired employees who receive monthly payments and younger employees who are still establishing their careers.
The much-needed changes to TSPs are expected to increase participation and long-term use of this government benefits program.
What Does the TSP Modernization Act Include?
With the current law, federal employees are only allowed one withdrawal from their accounts until they reach the age of 59 ½, and employees who leave federal service can only make one withdrawal of their balance. Not only are these restrictions confusing, but Congress has decided they are unnecessary.
Under the new rules of the TSP bill, federal employees would be able to:
- Make additional age-based withdrawals throughout their careers and lives.
- Make partial withdrawals after they leave the federal government.
- Leave their funds in their TSPs when they leave the government instead of transferring them to more expensive funds.
- Change the amount of their monthly payments whenever they want, not just once per year.
These rules haven’t been updated since 1986 when Thrift Savings Plans were first introduced, proving that updates to employee options and savings opportunities were long overdue.
Who Passed the TSP Bill?
In a bipartisan move, Sens. Rob Portman (R-Ohio) and Tom Carper (D-Del.) brought the TSP Modernization Act to the Senate in an effort to loosen withdrawal restrictions to give federal employees more flexibility. This was after house representatives Elijah Cummings (D-Md.), and Mark Meadows (R-N.C.) introduced the bill to the House. Having passed the House and the Senate, the bill will now head to the president to sign.
“With greater flexibility, studies show that participants are more likely to keep their assets in their TSP accounts,” Representative Cummings told GovExec.
While both parties might have fought about federal benefits cuts earlier this year, Congress members from both sides were willing and eager to move forward with the TSP updates without adding amendments.
What Are The Benefits of These Changes?
While the government benefits from increased participation and security in the system, federal employees actually benefit more from the TSP bill. While the changes will be felt differently across employees in different financial situations and ages, there are a few broad benefits to these upgrades.
Employees Will Support the System After They Leave Government
Along with increasing the flexibility for employees so they want to keep their retirement funds in their TSPs, the creators of this bill hope to teach people that they can leave the funds in the system until they’re ready to be removed.
For context, in 2013, employees who no longer worked for the federal government transferred $9 billion out of their TSPs. This is possibly because they wanted all of their retirement funds in one place or didn’t know if they would have access to their accounts after they left the federal government.
Flexibility Increases Likelihood of Enrollment
Restrictions to the current TSPs mean employees are less likely to sign up for retirement savings plans. If they’re unsure whether they’re going to work for the federal government until they retire or worry about the inaccessibility of their funds in an emergency then employees might not participate in TSPs at all. A lack of participation weakens the system, especially when employees withdraw their full balance upon leaving the federal government.
Employees Save On Retirement With Reduced Fees
One of the main benefits of choosing a TSP over a traditional IRA is the reduced fees. The costs that employees pay to invest their money is significantly lower than they would pay in the private sector. The team at FedSmith reports that these lower fees are currently the main argument the government makes for keeping employees participating in the system.
Employees might change their investments multiple times as they age to better account for their risk levels and needs. These changes can become expensive with high fees, cutting into their savings or limiting how often they improve their investment portfolios for a secure retirement.
Enroll in a TSP Today for a Better Retirement Tomorrow
If you’re unsure how changes to TSPs will affect your financial situation because of this bill, contact one of our benefits specialists to discuss your situation and options. Contact us today.